Question

“In the period of rising prices, LIFO method is more suitable than FIFO method”. Do you

agree? Prepare the Stores Ledger for the month of January from the following

information using both FIFO and LIFO method and draw the justifications for your

arguments.

1.01.2020 Opening Stock 300 units @ Rs.2.00 each

5.01.2020 Purchases 100 units @ Rs.3.30 each

10.01.2020 Purchases 150 units @ Rs.3.40 each

20.01.2020 Purchases 120 units @ Rs.1.50 each

2.01.20202 Issues 80 Units

7.01.2020 Issues 100 Units

12.01.2020 Issues 75 units

28.01.2020 Issues 250 units​

Answer 1

Reason to use the LIFO method in the period of rising prices:

The reason is that the income revealed on the company's tax return would be lower if LIFO relatively than FIFO were used; thus, there is a tax benefit of using LIFO.

If our inventory prices are going up, or are probable to increase, the LIFO estimate may be better, since the higher cost items (the ones purchased or made last) are sold.

Hope it helped...